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Flashcards in Mining & Metals Industry Outlook Deck (24)
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1
Q

Describe mining in one sentence.

A

A cyclical industry driven by global economic growth.

2
Q

Why is mining cyclical?

A

The mining industry is cyclical, thanks to the lag between investment decisions and new supply. Demand tends to grow in a relatively stable fashion on the back of global economic growth. By contrast, supply is added in bulk when a new development is completed.

3
Q

What nations are driving demand?

A

It’s not all about China

Infrastructure-driven growth in Asia, mainly China, has resulted in above-average economic growth and a significant increase in demand for commodities like iron ore, copper and coal. However, as can be seen from Figure 2, the USA and Europe account for more than 40 per cent of global GDP. Although their growth rates are nowhere near as impressive as those of the emerging markets, relatively small increases, or declines in growth can have an impact on metal demand, especially consumer driven demand.

4
Q

What are the top development and principal risks and uncertainties?

A
  1. Public perception
  2. Geopolitical and regulatory
  3. Technology and cyber
  4. Increased costs / pressure efficiency and effectiveness
  5. Macro-economic fluctuations
5
Q

What is the change in revenue, gearing, EBITDA and net debt to EBITDA for the top 40 miners?

A

Revenue: $600bn up 23%

Gearing: 31% down from 41%

EBITDA: $146bn up 38%

Net debt to EBITDA: improved by 38%

6
Q

What is the operating cost breakdown of the mining industry?

A
  1. Raw material and consumables
  2. Employee expenses + external services
  3. Government royalties paid / payable
  4. Freight and transport
  5. Other operating expenses
  6. Exploration and evaluation expenditures
7
Q

What are BHP’s productivity cost gains?

A

BHP Billiton has reported that, through its Maintenance Centre of Excellence initiative, it expects to save $1.2 billion across the business by FY2022, with a corresponding reduction in downtime of 20 per cent. The company also reports that unit costs have reduced by 15 per cent over the past two years.

8
Q

What are Rio Tinto’s productivity cost gains?

A

Rio Tinto identified $2.2 billion in operating cash cost improvements across 2016 and 2017 with the optimisation of its maintenance strategies, partnerships with suppliers and improvements in mine processes including cycle times identified as contributing factors.

9
Q

What are Anglo Americans cost gains?

A

Anglo American increased its production by 9 per cent, at a 26 per cent lower cost per unit, and its volume target for 2017 by $1.1 billion. It attributed these successes to its improved mine planning and the simplification of its operating structure. Anglo American also identified the potential to achieve a further $800 million benefit by 2022 and an additional $3-4 billion improvement in underlying EBITDA per annum, as a result of improved production and cost reduction.

10
Q

Discuss the record high increase in tax contributions?

A

The Top 40 tax expense increased by 81 per cent, with cash taxes paid to governments increasing by 67 per cent7 . This difference in growth partly reflects the lag between the tax expense and actual taxes paid.

With the exception of the USA, corporate tax rates have remained relatively stable across most key markets. The increase in tax expense is primarily driven by a profit increase and the impact of USA tax reforms (one-time impact of $2.8 billion or a 4 per cent increase in the effective tax rate largely due to the revaluation of deferred tax)8 . The USA tax reforms will ease the tax burden on USA operations going forward.

However, the lag in cash tax payments aided by the significant un-utilised tax losses across the Top 40 may create additional pressures for governments to increase the tax take as a way of addressing fiscal constraints. For example, certain governments in Africa are tempted to use tax as a way to get mining companies to the negotiating table to re-balance the share of economic resources from operations by claiming under declaration of revenue or export duties. While these claims are considered unsubstantiated, attention must be given to the trend these developments represent and how companies engage with governments in the future in the areas of taxes, royalties and overall sharing of economic benefits.

11
Q

Discuss the recent profitability of mining.

A

Profitability on all measures improved

Mining companies were able to capitalise on the increased price environment as the additional production capacity created at the end of the previous boom was able to deliver into healthy demand.

Improved operating cash flows allowed companies to implement their strategies, be it balance sheet restructuring, acquisitions, project development or simply returning profits to shareholders. We see a definite, measured and patient approach adopted by mining companies to execute on their respective strategies to deliver longterm value.

12
Q

Discuss how shareholders have been rewarded

A

We saw the beginning of this trend in 2017 when Anglo American reintroduced its dividend9 , which was suspended in 2016, and Rio Tinto paid a record level dividend of $5.2 billion in addition to an announced $4.5 billion share buyback10.

Of the Top 40, 23 have a formalised dividend policy that on average aims to pay dividends at 30-40 per cent of annual net profit. Based on current performance and expectations, dividends paid are likely to remain high in 2018.

13
Q

Discuss the current margins on development

A

Although these margins are still too low to incentivise significant new developments, the 25% forecast EBITDA margin for 2018 gets closer to the higher EBITDA margin required to sustain a capital-intensive industry like mining.

14
Q

Discuss the sentiment of the top 40 on growth

A

From risks disclosure, we see that the Top 40 are still comfortable that low levels of exploration and new resource acquisition pose a relatively low risk. They are comfortable that they can acquire at will and at reasonable prices when they want to expand. However, the current lack of investment in exploration and capital projects will eventually catch up. Following a clear growth strategy through the cycle will help companies avoid the mad rush for resources at the top of the cycle.

15
Q

What is the increase in market cap and dividends paid for the top 40?

A

Market cap up by 30% from $714bn to $926bn

Dividends paid increased by 125% from $16bn to $36bn

16
Q

Discuss how the top 40 have optimized their portfolios?

A
  1. Companies are seeking to optimise their asset portfolio by divesting non-core assets in order to refocus and redeploy capital. For example, Rio Tinto was very successful in monetising its non-core Australian coal assets and becoming the only major in the Top 3 to no longer hold any interest in coal. The total consideration received, which exceeded market expectations, was in excess of $6 billion11.
  2. Companies are seeking to increase their existing ownership interests in operating mines – for example, Glencore increasing its ownership interest in Mutanda Mining SARL (to 100 per cent) and the Katanga mine in the Democratic Republic of Congo (both coppercobalt) as well as the Volcan Compañía Minera S.A.A. zinc asset in Peru.
  3. Top 40 members are partnering with other majors or mid-tier miners in order to leverage infrastructure, identify operating synergies and/or provide access to finance. For example, in 2017 Barrick Gold entered into agreements with Shandong Gold and Goldcorp, establishing partnerships to operate, develop and explore in Argentina and Chile respectively.
17
Q

Describe the low capital investment (CAPEX) situation.

A

Low capital investment set to turn – but will it be disciplined?

The level of capital expenditure (capex) has remained at its lowest level over the last 10 years, with capital velocity at the lowest rate since the first edition of Mine in 2004. Other than sustaining capital expenditure, new projects above $500 million approved during the year were limited to a couple of copper projects.

Sustaining capex also expected to increase

Given the challenging environment for the last five years, it is likely that sustaining capital expenditure has fallen behind as some mining companies moved into harvesting mode in order to survive the downturn. As a result, our capital expenditure forecasts include a significant step up from the current low levels, despite the lack of new projects announced.

18
Q

Tempting times ahead! What should we consider?

A

Tempting times ahead! What should we consider?

While Top 40 miners are enjoying a bounce back, vigilance is key. Temptations loom in many guises for miners and their stakeholders. Miners will need to stay focused and deliberate towards the long-term goal of creating sustainable value for all stakeholders. In particular, a watching brief will be on the following issues:

  1. Financial capital
  2. Intellectual capital
  3. Human capital
  4. Market disruption
  5. Manufactured capital
  6. Social and relations
19
Q

Tempting times ahead! What should we consider? Financial capital

A

Financial capital

  1. Manage increased shareholder demands
  2. Consider response to more private equity entrants of an investment-for-value basis and subsequent disruption
20
Q

Tempting times ahead! What should we consider? Intellectual capital

A

Intellectual capital

  1. Maintain relentless focus on costs
21
Q

Tempting times ahead! What should we consider? Human capital

A

Human capital

  1. Manage technology & workforce considerations
22
Q

Tempting times ahead! What should we consider? Market disruption

A

Market disruption

  1. Ongoing macro-economic fluctuations including sanctions and tariffs
  2. Increased vertical integration as commodity users position themselves in anticipation of price increases
  3. Consolidation in the steel industry might create greater purchasing power and pressure on prices
  4. User trends, such as single sourcing vs. spot buying
23
Q

Tempting times ahead! What should we consider? Manufactured capital

A

Manufactured capital

  1. Address deficit in capex and exploration levels while maintaining investment discipline
24
Q

Tempting times ahead! What should we consider? Social and relations capital

A

Social and relations

  1. Address stakeholder demands, including changing environmental regulation and tax regimes